Barclays profit dips 3% as write-downs rise

Dividend raised 10%; investment-banking arm targets U.S. growth

By

SimonKennedy

LONDON (MarketWatch) -- U.K. banking group Barclays on Tuesday announced a 3% drop in 2007 net profit, largely matching market expectations, as a relatively small increase in write-downs and tight cost controls helped balance a weaker result from international banking.

Net write-downs for the year totaled 1.64 billion pounds ($3.22 billion), up from the 1.3 billion pounds that Barclays (BARC)
BCS, -2.09%
announced in November, though the total also includes a gain of around 658 million pounds on the revaluation of its own debt.

CEO John Varley said the result reflected the diversity of the bank's profit base, while management also offered a relatively upbeat outlook for 2008.

Bob Diamond, the bank's president and head of investment banking, said he expects a U.S. economic downturn to be "shorter and shallower" than many people are predicting, helped by a swift reaction from the Federal Reserve to cut interest rates.

He also played down fears that the firm will have to take further write-downs in 2008.

Analysts highlighted that write-downs on Barclays' collateralized debt obligations were only around 20% of their value compared to close to 60% for other European banks.

But Diamond said on a conference call that factoring in hedging positions and other effects, the write-downs are equivalent to around 70% of holdings.

He added that, for other exposures such as Alt-A mortgages, the quality of the underlying mortgages was higher than at some competitors. Alt-A mortgages fall between subprime and prime in terms of risk.

Barclays also set a new performance target for compound earnings growth of 5% to 10% a year through 2011.

Shares in the group gained 3.3%, having fallen in early trading. The shares had already rallied around 8% on Monday, but still remain more than 30% below their year-ago level.

The stock was also helped by Barclays' decision to increase its final dividend by 10% to 22.5 pence a share.

Other U.K. banks also gained ground Tuesday, though some European banks were under pressure after Credit Suisse
CS, -2.65%
announced it had cut the value of certain asset-backed positions by $2.85 billion following an internal investigation that identified "pricing errors" by some traders. See full story.

BarCap also provided an update on its remaining exposure to U.S. mortgages and other potentially risky debt.

The group said it has net exposure of 4.7 billion pounds to collateralized debt obligations and another 5.04 billion pounds to other U.S. subprime mortgages.

In addition exposure to Alt-A mortgages was 4.9 billion pounds and to bond insurers it was 1.3 billion pounds.

Keefe, Bruyette & Woods analyst James Hutson said the lack of write-downs on any Alt-A exposure may raise questions after other banks including UBS took fourth-quarter charges against these mortgages, which lie between subprime and prime mortgages in terms of risk.

Barclays' Diamond said the bank intends to capitalize on the weak position of some of its rivals by aggressively targeting growth in the U.S. He noted that big write-downs have hurt the major U.S. investment banks and created an opportunity for Barclays to become a top-tier firm in the region.

"All of a sudden the U.S. has moved very high on our priority list," Diamond said.

Among other divisions, U.K. retail and commercial banking, pretax profit increased 4% to 2.65 billion pounds, helped by gains of 232 million pounds from the sale and leaseback of properties as well as tighter cost controls.

In the Barclaycard credit card unit, pretax profit jumped 18% to 540 million pounds as impairment charges continued to improve, reflecting fewer delinquencies and lower levels of arrears.

The international banking unit, however, reported a 23% drop in pretax profit to 935 million pounds due to higher impairment charges and the impact of exchange rates.

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